Stock Market, Stock Exchange and the PSE

       It's Sunday night right now while I'm writing this one and tomorrow will be the first trading day of the week again. I'm excited because I have some cash ready for bargain hunting. It was from the selling of my DGTL shares last week. Will my favorite stock, PX, continue to go up and reach my target price of 20-21? We will see.

       Going back to my topic, stock market. Taking its meaning from Investopedia, "stock market is the market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance".

       From Wikipedia, "a stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately".

       So stock market is almost like the market we see everyday where buying and selling is being done except that in stock market we are dealing with company stocks or shares. While stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. New York Stock Exchange (NYSE), Tokyo Stock Exchange, Shanghai Stock Exchange, Deutsche Börse and of course the Philippine Stock Exchange which is located in Makati to name a few of stock exchange around the globe. To be able to trade a security on a certain stock exchange, it has to be listed there. Examples of those listed in Philippine Stock Exchange are Ayala Corporation (AC), Bank of the Philippine Islands (BPI), Jollibee Foods Corporation (JFC) and Philex Mining Corporation (PX).

       The Philippine Stock Exchange (Filipino: Pamilihang Sapi ng Pilipinas) (PSE) is the one of the two stock exchange companies in the Philippines,the other being, Philippine Dealing Exchange (PDEx). The PSE is one of the longest operating stock exchanges in Southeast Asia since its inception in 1927. It currently maintains two trading floors, one in Makati City's Central Business District and one at its headquarters in Pasig City.

       The main index for PSE is the PSE Composite Index or PSEi, which is composed of thirty (30) listed companies. The selection of companies in the PSEi is based on a specific set of criteria. The PSEi reached an all-time high of 4,087.96 points at the close of trading on September 21, 2010. That was only last week. To Know more about Philippine Stock Exchange, you may visit their website, http://www.pse.com.ph/.

       Stock exchanges have multiple roles in the economy. This may include the following;

1. Raising capital for businesses 

       The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public. 

2. Mobilizing savings for investment

       When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. 

3. Facilitating company growth

       Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. 

4. Profit sharing

       Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses. 

5. Corporate governance

       By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. 

6. Government capital-raising for development projects

       Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. 

7. Barometer of the economy

       At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

8. Creating investment opportunities for small investors!!! <---- THAT'S US (IYAN TAYO)  

       As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

             "Lastly, isn't it so nice to be an owner of a business without ever having to show yourself at work? How about just sitting back or taking a vacation, watching the company grow and just waiting for the dividend checks to come? Retiring as a millionaire, anyone? This might sound like a very nice dream but it's closer to reality actually. 

- Romer

NEXT: STOCK AND SHARES